Issues in regional economic integration : evidence from ASEAN Free Trade Area (AFTA)

This thesis explores trade, FDI and growth, and aims to highlight issues related to regional economic integration arising from ASEAN experience. Chapter 2 empirically investigates the effect of trade creation and trade diversion in ASEAN. Using the gravity model, this study examines whether the formation of the ASEAN Free Trade Area (AFTA) and the enlargement of ASEAN membership resulted in an increase in intra-and extra-regional trade for the period 1984 to 2003. From basic gravity variables, the study found that GDP, population, relative endowment, distance and common language are the main determinants of bilateral trade in ASEAN. The ASEAN dummies used to measure the intra ASEAN trade indicate that there was trade creation among the five ASEAN members, reinforced by the expansion of new membership to ten members. Chapter 3 addresses the effects of intra-regional-FDI as well as extra-regional-FDI in the ASEAN free trade area. The gravity model is employed in this study. The model is estimated using cross section and panel data analysis. The major finding of this chapter is the ASEAN5 invest in each other less than they invested in the new ASEAN members. The results from extra-regional-FDI revealed that some regional economies such as those in Europe and North America preferred to invest in Singapore than other countries in ASEAN. Chapter 4 is another empirical study that aims to examine the effect of convergence and growth in ASEAN countries including the period after the formation of AFTA. The growth model is derived from the neoclassical model, namely the Solow model and modified in the dynamic form for empirical purposes by fully utilizing the dynamic heterogeneous panel approach, namely Pooled Mean Group Estimator (PMGE). Preliminary graphical observations find strong evidence of β and σ convergence after the formation of the ASEAN free trade agreements and the expansion of membership.